Although you wouldn’t necessarily know it to look at him, George Soros is a financial heavyweight.
During the years when Mike Tyson was considered the baddest man on the planet, George Soros was engineering a trade that would go down in history for breaking the Bank of England. While Tyson went on to make nearly $30 million a fight, Soros’ thumping of the BOE earned him around $1 billion. So, if money is your measure, then Tyson has nothing on Soros.
In this article we’ll look at the trade that made Soros a feared name worldwide and still stands as the greatest currency trade ever made.
In the original plans for a pan-European currency, England was going to join Germany and the other European nations. When the euro debuted in 1999, England was not a part of it. To understand the reason why one of Europe’s most distinguished nations was absent from the Eurozone, we have to go back to the European Exchange Rate Mechanism (ERM). The ERM was introduced to stabilize the exchange rates between European nations in preparation for greater unification through the euro.
As with many pan-european plans, cracks started to show before the first steps were even taken. By the 1990s, Germany had established itself as the powerhouse economy on the European continent. Reunification between East and West Germany was a work in progress, but the new Germany still lead the way in industrial production and technological innovation. England, on the other hand, was suffering from inflation and a stagnating economy. Nonetheless, England insisted that it enter the ERM at a rate of 2.7 German marks to the pound. The lofty valuation for the pound began to look shakier and shakier as the economic conditions in England worsened in the fall of 1992.
Shorting pressure began to build around the pound in early September. The ERM had a 6% tolerance as far as value fluctuations relative to the other member currencies, meaning that the BOE was responsible for keeping its currency within 6% of the value it had entered into the ERM at. Staying within 6% of 2.7 marks to the pound was taking a tremendous effort, including an ever-rising interest rate to attract investment through carry trades. Despite the interest rate hikes, forex traders kept piling on to the short side of the trade fully expecting the BOE to exceed the 6% limit.
George Soros was among those currency traders shorting the pound. Through his Quantum Fund, Soros borrowed and leveraged enough money to sell short $10 billion dollars worth of the pound. This added considerable downward pressure to an already difficult situation. The Bank of England was not oblivious to the position it was in, but central banks have very few tools to control the international value of their respective currencies. Interest rates were raised from 10% to 12% to 15% in a matter of days and multiple purchases of bonds were made in hopes of propping up the pound.
No matter how deep your pockets are, fighting the market is a losing battle. On September 16, 1992, the British government was forced to announce that it was pulling out of the European ERM and the pound dropped sharply in value. September 16 is remembered as Black Wednesday by the Bank of England. Soros made over $1 billion from his leveraged bet as the value of the pound fell 15% in September and slid 30% in total by that December. The fight to keep the pound in the ERM cost the Bank of England billions, earning Soros the title of The Man Who Broke The Bank Of England.
In reality, Soros alone didn’t break the Bank of England. Many other currency traders were short the pound, Soros’ position was simply one of the largest that could be ascribed to an individual. Poor economic policies broke the Bank of England, and the devaluation of the pound and withdrawal from the ERM was a boon to the pound in the long term. England was able to recover outside the eurozone in a way it could not have inside. That said, the way in which it happened and the fact that Soros made a billion while England lost billions made Soros an easy target for general anger.
Unlike the other baddest man on the planet, Soros continued his winning ways on the world stage. Whereas Tyson was out-boxed and out-bullied by Evander Holyfield in 1996, Soros spent 1997 profiting from the Asian financial crisis, making enemies out of entire nations in Malaysia and Thailand. Soros was accused of being a financial assassin by politicians, economists and market commentators, but he kept on trading and kept on winning more than he lost. However, traders are not so different than boxers - eventually time catches up. Although Soros is still investing and trading, his fund is now closed to all but his family members. Soros is now called a philanthropist instead of a financial assassin, as his focus has shifted away from accumulating wealth and towards dispersing it.
Will Soros always be the name that pops to mind when we think of the greatest currency trades ever made? Probably not, and for the same reason that Mike Tyson will not always be the most dominant heavyweight champion in history - new trades are being made every second, and one will eventually eclipse even Soros’ mark. That said, when you win the belt, nobody can take that away from you. Mike Tyson will always be remembered as a heavyweight champion and George Soros will always be The Man Who Broke The Bank Of England - whether it remains as the greatest trade or not.
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Andrew Beattie has spent most of his career writing, editing and managing financial content as well as more general web site material in all its many forms. He is especially interested in the future of search and the application of analytics to the business world. He has been a long-time contributor to Investopedia.com and is currently venturing forth on ForexDictionary. Full Bio
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